The Fed raised interest rates for the first time in 27 months Wednesday, coming off the mat slightly to a 0.25-0.50% range, with the much-discussed balance sheet reduction to begin at “a coming meeting.” The average Fed official now expects a quarter-point rate hike in each of the next seven Fed meetings in 2022.
Further, expectations are for a Fed funds rate +2.8% for both 2023 and 2024. This would put the Fed on a course to take its funds rate above the neutral rate of +2.4% over this time. Although a quarter-point hike this afternoon seems reasonably dovish, this longer-term dot-lot appears much more hawkish than earlier expected.
The Fed expects inflation to remain elevated until mid-this year. Estimates among Fed officials have gone up notably for each of the next three years: +65% in 2022 to +4.3%, +17% in 2023 to +2.7%, and +10% for 2024 to 2.3%. This would bring the economy back to a near-optimum yearly inflation rate of 2%. Also, as Chair Jay Powell pointed out in his press conference, reducing the $9 trillion on the balance sheet would add to monetary tightening.
Market indexes reacted across a fairly wide spectrum: while the Dow, Nasdaq and S&P 500 all saw gains dwindle in the minutes following the Fed statement release, only the Dow dipped into negative territory for a time. They began to flow back up as the press conference moved along, and have hit the closing bell at session highs: the Dow +518 points, +1.55%, the Nasdaq +487, +3.77% and the S&P 500 +95 points, 2.24%.
More highlights from the Powell presser include: the Russia-Ukraine war do not particularly raise recession risks in the U.S., though it is adding “upward pressure on inflation,” according to the Fed Chair; the U.S. labor market is “extremely tight”; and he still expects inflation to come down in the second half of this year. Should this be the case, look for a moderation on the hawkish seven-more hikes this year at a forthcoming Fed meeting or press conference.
That said, Powell also said “if it is appropriate” to raise rates quicker, it will do so. He mentioned the Fed is “acutely aware of the need to return to price stability,” and is making sure high inflation “does not become entrenched.” He noted wages gains among the bottom quintile of American workers, but expects that to slow over time — he does not see this wage growth as a push on inflation.
So with this question mark erased from monetary policy — with currently a 100% chance of another 25 bps hike for the next three meetings (the next is May 3-4), according to analysts — we can now move onto other considerations. Clearly the war in Ukraine could use some sort of effective diplomacy to bring down the heat and carnage, which would be a further tailwind to this market.
It may be too early to say the bear market we’ve been slogging through these past few months is over, or whether there is another leg down based on strained inflation and an escalation of tensions in Eastern Europe. Are consumers becoming overwhelmed by high gasoline and natural gas heating prices to keep demand in the economy apace with strong growth?
And this is to say nothing of the flattening yield curve between 2-year and 10-year bonds, which dipped below 25 bps for a short time this afternoon. (An inverted yield curve is a signal toward recession.) So while it’s nice to be filling in some potholes today and yesterday, there is still plenty of work ahead to get us back to 52-week highs.
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Fed Raises Rates 25 bps as Expected, Markets Rally
The Fed raised interest rates for the first time in 27 months Wednesday, coming off the mat slightly to a 0.25-0.50% range, with the much-discussed balance sheet reduction to begin at “a coming meeting.” The average Fed official now expects a quarter-point rate hike in each of the next seven Fed meetings in 2022.
Further, expectations are for a Fed funds rate +2.8% for both 2023 and 2024. This would put the Fed on a course to take its funds rate above the neutral rate of +2.4% over this time. Although a quarter-point hike this afternoon seems reasonably dovish, this longer-term dot-lot appears much more hawkish than earlier expected.
The Fed expects inflation to remain elevated until mid-this year. Estimates among Fed officials have gone up notably for each of the next three years: +65% in 2022 to +4.3%, +17% in 2023 to +2.7%, and +10% for 2024 to 2.3%. This would bring the economy back to a near-optimum yearly inflation rate of 2%. Also, as Chair Jay Powell pointed out in his press conference, reducing the $9 trillion on the balance sheet would add to monetary tightening.
Market indexes reacted across a fairly wide spectrum: while the Dow, Nasdaq and S&P 500 all saw gains dwindle in the minutes following the Fed statement release, only the Dow dipped into negative territory for a time. They began to flow back up as the press conference moved along, and have hit the closing bell at session highs: the Dow +518 points, +1.55%, the Nasdaq +487, +3.77% and the S&P 500 +95 points, 2.24%.
More highlights from the Powell presser include: the Russia-Ukraine war do not particularly raise recession risks in the U.S., though it is adding “upward pressure on inflation,” according to the Fed Chair; the U.S. labor market is “extremely tight”; and he still expects inflation to come down in the second half of this year. Should this be the case, look for a moderation on the hawkish seven-more hikes this year at a forthcoming Fed meeting or press conference.
That said, Powell also said “if it is appropriate” to raise rates quicker, it will do so. He mentioned the Fed is “acutely aware of the need to return to price stability,” and is making sure high inflation “does not become entrenched.” He noted wages gains among the bottom quintile of American workers, but expects that to slow over time — he does not see this wage growth as a push on inflation.
So with this question mark erased from monetary policy — with currently a 100% chance of another 25 bps hike for the next three meetings (the next is May 3-4), according to analysts — we can now move onto other considerations. Clearly the war in Ukraine could use some sort of effective diplomacy to bring down the heat and carnage, which would be a further tailwind to this market.
It may be too early to say the bear market we’ve been slogging through these past few months is over, or whether there is another leg down based on strained inflation and an escalation of tensions in Eastern Europe. Are consumers becoming overwhelmed by high gasoline and natural gas heating prices to keep demand in the economy apace with strong growth?
And this is to say nothing of the flattening yield curve between 2-year and 10-year bonds, which dipped below 25 bps for a short time this afternoon. (An inverted yield curve is a signal toward recession.) So while it’s nice to be filling in some potholes today and yesterday, there is still plenty of work ahead to get us back to 52-week highs.
Questions or comments about this article and/or its author? Click here>>